First let me say this – the perfect portfolio on paper is not the perfect portfolio in reality. In fact, it’s not even close. Successful investing is more about human behavior than anything else, and behavior is a subjective phenomenon. Behavior lacks the benefit of constant inputs. It’s a moving target, rendering mathematical models to nothing more than a fuzzy framework at which to start. You can’t focus on the data without factoring in behavioral issues.

For example, building the perfect portfolio on paper would result in blending asset classes to maximize expected return while keeping potential risk as low as possible. The resulting portfolio is a product of your assumptions (which is a scary word, especially for this exercise) and your restrictions. Every bit of input is a moving target (returns, correlations, investor restrictions, etc)…so take your exactness and discount accordingly.

So, what does the perfect portfolio look like?

It’s actually simple. It’s a portfolio that’s understood, not just by the party building it, but the party whose wealth is invested in it. That’s it – simple. The perfect portfolio is understood.

While simple in concept, not easy in practice. Investing is a world that’s misunderstood in a big way by the general public. Believe me, we see and hear horror stories first hand routinely. There’s an asymmetry of investment understanding that places responsibility on the shoulders of those on the right side of that skew. Those who can truly help enhance outcomes and attack the behavior gap through clarity of process should embrace that opportunity. It requires transparent communication about the what and why, the good and bad, articulated in a way to build needed conviction. As we like to say, argue with yourself… out loud.

One size does not fit all and there’s surely more than one way to construct a perfect portfolio. Our hope is to build into relationships through transparency and consistent communication to increase understanding. The best portfolios are the ones that can be stuck to. Always keep in mind, simple beats complex.